BEIJING/PARIS (Reuters) -China imposed temporary anti-dumping measures on imports of brandy from the EU on Tuesday, hitting French brands including Hennessy and Remy Martin, days after the 27-state bloc voted for tariffs on Chinese-made electric vehicles (EVs).
China's commerce ministry said preliminary findings of an investigation had determined that dumping of brandy from the European Union threatens "substantial damage" to its own sector.
France's trade ministry said the temporary Chinese measures were "incomprehensible" and violated free trade, and that it would work with the European Commission to challenge the move at the World Trade Organization.
In a sign of the rising trade tensions, China's ministry added in another statement on Tuesday that an ongoing anti-dumping and anti-subsidy investigation into EU pork products would make "objective and fair" decisions when it concludes.
It also said that it was considering a hike in tariffs on imports of large-engine vehicles, which would hit German producers hardest. German exports of vehicles with engines of 2.5 litres or larger to China reached $1.2 billion last year.
France was seen as the target of Beijing's brandy probe due to its support of tariffs on China-made EVs. French brandy shipments to China reached $1.7 billion last year and accounted for 99% of the country's imports of the spirit.
As of Oct. 11, importers of brandy originating in the EU will have to put down security deposits mostly ranging from 34.8% to 39.0% of the import value, the ministry said.
"This announcement clearly shows that China is determined to tax us in response to European decisions on Chinese electric vehicles," French cognac producers group BNIC said in an email.
French President Emmanuel Macron said last week that China's brandy probe was "pure retaliation", while EV tariffs were needed to preserve a level playing field.
SHARES TUMBLE
LVMH owned Hennessy and Remy Martin were among the brands hardest hit by the measures, with importers having to pay security deposits of 39.0% and 38.1%, respectively.
The deposits would make it more costly upfront to import brandy from the EU. However they could be returned if a deal is eventually reached before definitive tariffs are imposed.
Both the investigation and negotiations remain ongoing, said an executive at a leading cognac company, who declined to be identified due to the sensitivity of the matter.
Chinese investigators visited producers in France last month and were due to make further site visits, the executive said, while Chinese and EU officials held negotiations on Monday.
The outcome was unclear, however, and doubts around the EU's willingness to make a deal were emerging, they added.
Shares in Pernod Ricard (EPA:PERP) were down 4.2% at 0839 GMT, while Remy Cointreau's dropped 8.7% and shares in LVMH, owner of Hennessy, fell 4.9%.
Companies that cooperated with China's investigation were hit with security deposit rates of 34.8%, with that imposed on Martell the lowest at 30.6%.
Pernod Ricard, Remy Cointreau and LVMH did not immediately respond to requests for comment.
The measures could mean a 20% price rise for consumers in China, said Jefferies analysts, reducing sales volumes by 20%.
Remy, with the greatest exposure to the Chinese market, could see its sales decline by 6%, with Pernod group sales seeing a 1.6% impact, they said.
China is the second largest export market for cognac after the United States, but is the industry's most profitable territory. Difficult economic conditions in both markets have already prompted a sharp decline in cognac sales.
James Sym, fund manager at Remy investor River Global, said despite this, there was no sign that demand for cognac had fundamentally changed, pointing to an uptick in cognac sales in Japan driven by Chinese tourists when the yen was weak.
"That's obviously a sign that cognac is not out of fashion," he said, adding volumes – and the companies' share prices – should recover long-term, although the tariffs would likely hit volumes and margins while in place.
TALKS CONTINUE
Luxury goods shares fell by as much as 7% on Tuesday, with one trader attributing this to fears that the sector, which is heavily reliant on China, could be next to see trade measures.
The brandy measures follow a vote by the EU to adopt tariffs on China-made EVs by the end of October.
Before the vote in late August, China had suspended its planned anti-dumping measures on EU brandy, in an apparent goodwill gesture, despite determining it had been sold in China at below-market prices.
At the time, the commerce ministry said its probe would end before Jan. 5, 2025, but that it could be extended.
China's commerce ministry previously said it had found that European distillers had been selling brandy in its 1.4 billion-strong consumer market at a dumping margin in the range of 30.6% to 39% and that its domestic industry had been damaged.
In the EU's decision to impose tariffs on China-made EVs, the bloc set tariff rates on top of the 10% car import duty ranging from 7.8% for Tesla (NASDAQ:TSLA) to 35.3% for SAIC and other producers deemed not to have cooperated with its investigation.
The European Commission has said it is willing to continue negotiating an alternative, even after tariffs are imposed.